Nobody saw it coming.
To pick a winning stock at the start of March, you had to find a company that was hated by analysts, adored by short sellers, avoided by institutional buyers and averse to doing just about anything but pay dividends. Shares with those characteristics have generated returns of as much as 5.8 percent even as the Standard & Poor’s 500 Index stood still, data compiled by Bespoke Investment Group LLC and Bloomberg show.
The unlikelihood of arriving at such a blueprint after a five-year bull market is taking a toll on asset managers, with more than 80 percent of growth and value funds trailing benchmarks in 2014. For investors coming back to the market just as losses in Internet shares approach 20 percent, it’s a lesson on how little past performance says about the future.
“When you are fighting a market trend, you have to choose whether you have to ride it, or you get out of the way,” Jerry Braakman, chief investment officer of First American Trust in Santa Ana, California, said by phone on May 8. His firm, which manages $1.1 billion, trailed the S&P 500 in the first quarter and has cut holdings in financial and consumer-discretionary shares while adding to stakes in energy and utilities. “It’s just been a difficult market.”
U.S. stocks fell last week, giving the Nasdaq Composite Index its worst decline in a month, as a technology and small- cap selloff overshadowed optimism the Federal Reserve will continue to support the economy.
Equities advanced today, sending the Dow Jones Industrial Average to an all-time high, as deals activity boosted confidence in the economy. The S&P 500 rose 0.8 percent to 1,892.54 at 10:16 a.m. in New York, topping a record close from April.
New Leadership
Stocks that were snapped up last year because of the promise of future earnings growth became losers in March, April and May. Los Gatos, California-based Netflix Inc., which rallied 298 percent in 2013, is down 26 percent. Amazon.com Inc. in Seattle, up 59 percent last year and 383 percent since March 2009, has fallen 19 percent.
In their place are companies that trade at the smallest multiples to profits, get the lowest ratings from Wall Street firms, attract the fewest mutual fund owners and have the highest short interest. Energy companies in the S&P 500, with an average price-earnings multiple of less than 15 at the start of March, have jumped 7.4 percent since then, beating all other industries except for phone stocks.
Telecommunications companies offering dividends averaging 4.9 percent two months ago are up 8.3 percent. Utilities that were paying out 3.8 percent and were most hated by money managers in a March survey by Citigroup Inc., added 4.9 percent.